The Cost of Beer Index
Inspired by The Economist’s publication of the BigMac index, we at Estimand are building the Cost of Beer Index. Instead of measuring the strength of currencies like The Economist, we want to determine if the daily cost of making a bottle of beer is going up or down. Then, measure the causal relationship between beer and other parts of the economy.
Beer is a symbol of social well-being. Globally, 1 in every 110 jobs are linked to the beer industry [Kedia 2023]. This makes beer an essential indicator of community strength and personal well-being. A high cost of beer production means that people are struggling, whereas a lower cost points to improved community bonds.
Sociologist Ray Oldenburg argues the importance of local bars and pubs. He describes this third place as “places where camaraderie and joviality occurred, where we can enjoy one’s company outside of home (the ‘first’ space) and work (the ‘second’ space).” Such locations help forge connections with others [Mifsud 2018].
What is an Index?
The S&P 500 Index is one of the most recognized indexes. Including 80% of the stock market, it is this measure that news organizations use when they refer to the market being up or down. Calculating the S&P 500 is simple. The value is based on each company’s share price multiplied by the total number of shares. However, the implications of the measure are much more profound.
A financial index tracks the performance of a group of assets in a standardized way [Chen 2023]. The Chicago Board Options Exchange’s (CBOE) Volatility Index (VIX) measures the 30-day expectation of S&P 500 volatility. It illustrates the expected fluctuation of the stock market.
The Big Mac index has become a global standard by comparing the price of a McDonald’s Big Mac in one country to another. For example, a Big Mac costs £4.19 in Britain and US$5.58 in the United States. The implied exchange rate is 0.75. The difference between this and the actual exchange rate, 0.78, suggests the British pound is 3.4% undervalued against the US dollar. [The Economist 2023].
The Ingredients in Beer
Beer consists of 4 main ingredients: water, malt, hops, and yeast. Malt is a manufactured ingredient from barley, corn, or some other grain mixture. Malts are created when the grain is soaked and allowed to sprout. As the seed germinates, enzymes convert starch and proteins into sugars and amino acids [The Growler Guys 2023]. This becomes the food for the yeast.
As yeast consumes the sugars, it converts them into carbonation and alcohol. Based on the robustness of the yeast and the amount of sugar available, the alcohol level is set. Many brewers use a proprietary yeast. However, there is a market for commercial yeast where each strain is dedicated to a specific purpose.
After fermentation, hops, a green cone-shaped flower from the Humulus lupulus plant, are added [The Growler Guys 2023]. This was originally a means to preserve the beer. Today, it is primarily used to provide a rich tapestry of flavors and textures. Like malts, there are many types of hops. Most are proprietary strains, each one with a specific flavor profile.
A Standard Beer
Before we can index the cost of beer production, we must first settle on a standard beer recipe. Since we are focused on the United States market, the index will reflect the cost of making a Standard American Lager.
The most traditional recipe comes from Riggs Beer Company in Urbana, Illinois. We will use a 5-gallon recipe and then convert it for the cost of producing a 12oz bottle. It consists of 7 pounds of six-row malt, 2 pounds of whole-kernel corn, 0.3 ounces of Magnum Hops, 0.2 ounces of Crystal Hops, and 23 grams of Fermentis SafLager W-34/70 dry yeast [Riggs Beer Company 2020].
For conversion, we convert gallons into ounces, where 5 gallons equals 640 ounces. Divide that by 12, and we have 53 bottles of beer from our 5-gallon recipe. What is not accounted for is the labor or water costs.
The Beer Cost Index Calculation
Like any model, the index is an approximation, not a precise measurement. Here, we add up the current cost of each ingredient and then divide by 53 to determine the cost per bottle of beer produced. For example,
Six-row malt (7 lbs): $14.00
Whole-kernel corn (2 lbs): $5.00
Magnum Hops (0.3 oz): $0.30
Crystal Hops (0.2 oz): $0.20
Fermentis SafLager W-34/70 dry yeast (23 g): $6.00
Today, these ingredients cost $25.50 per 5 gallons batch. Divide that by 53 to obtain the cost per bottle; we have $0.48. To make it an index, we just run the calculation each day, starting with some date in the past. However, to establish a benchmark, we must create a daily market price for each ingredient. Otherwise, the calculation will become skewed by such factors as promotional pricing from individual vendors.
What the Index Measures
Our Cost of Beer Index measures the cost of producing beer within the United States. It signifies the availability of social connections within a community based on economic factors. Even for those who do not drink beer, the increase in the cost of production has an impact.
Beer represents the availability of leisure time. As it becomes more challenging to acquire, so do the associated social activities — restaurant meals, sporting events, and festivals. Therefore, the cost of beer is a nearly direct measure of a society’s economic well-being.
References
- Chen, J. (2023) What Is an Index? Examples, How It’s Used, and How to Invest. Investopedia. https://www.investopedia.com/terms/i/index.asp
- Kedia, V. (2023) Beer & Culture: How Different Societies Embrace & Celebrate the Brew. Brewer World. https://www.brewer-world.com/30098-2/
- Mifsud, C. (2018) Why Beer Is the World’s Most Beloved Drink. Time. https://time.com/5407072/why-beer-is-most-popular-drink-world/
- The Economist (2023) Our Big Mac index shows how burger prices are changing. https://www.economist.com/big-mac-index
- The Growler Guys (2023) Understanding the 4 Main Ingredients of Beer. https://thegrowlerguys.com/understanding-the-4-main-ingredients-of-beer/
- Riggs Beer Company (2020) Recipe: Riggs American Lager. https://beerandbrewing.com/recipe-riggs-american-lager/
